Case 5

Debt Financing and Bankruptcy

Lynna Revard

Trident University

Abstract

The purpose of this paper is to go into detail and explain the different aspects of debt financing, bankruptcy, and the outcome of Hostess Brand Inc., filing for bankruptcy. It will go into detail of what debt financing is how to avoid different aspects of it. I will also go into detail and explain not only the history of bankruptcy, but also the different chapters of bankruptcy and how each one differs from the other. You will read about things that you might already know and hopefully by the end of this paper I am able to teach some things that you were possibly not aware of.

Main Body

Hostess Brands Inc. and its beloved bread and snack cake products date back to the late 1800s. Its brands are some of the best known snacks and breads in the United States. They make many of the top-selling snack cakes in convenience stores, including Twinkies®, CupCakes and Fruit Pies. Before becoming Hostess Brand Inc., the company was known by many names. Interstate Bakeries Corporation, Holsum Bakeries, Bakers Inn, Hostess Bakeries, and Hostess just to name a few. Effective November 2, 2009, the company was renamed Hostess Brands, Inc. after the cake division that featured Twinkies and Cupcakes although it continues its bread line including Wonder Bread. It has been a very successfully company since it started its productions however; in 2004 the company had to file for bankruptcy and again in 2012.

The recent file for bankruptcy by the company, from what they said “is stated to be due to the company said it "is not competitive, primarily due to legacy pension and medical benefit obligations and restrictive work rules." Hostess Brands Inc. filed for Chapter 11 bankruptcy protection in efforts to confront burdensome debt and labor costs that the company has been fighting for so long. Chapter 11 bankruptcy was filed due to it being a chapter of the United States Bankruptcy Code which permits reorganization under the bankruptcy laws of the United States.

Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most significantly used by corporate entities. In compared, Chapter 7 governs the process of a liquidation bankruptcy, while Chapter13 provides a reorganization process for the majority of private individuals. When a business is unable to facilitate its debt or pay its creditors, the business or its creditors can file a federal bankruptcy court for protection under either Chapter 7 or Chapter 11. Chapter 11 also holds many of the features present in all, or most, bankruptcy proceedings in the U.S. it provides additional tools for debtors as well. It presents the debtor in possession a number of mechanisms to restructure its business. A debtor in ownership can acquire financing and loans on promising terms by giving new lenders first priority on the business’ earnings.

When filing for bankruptcy, there are numerous different Chapters that can be chosen from. Bankruptcy has Chapters 7, 9, 11, 12, 13, and 15. In choosing Chapter 7, debtors give up their non-exempt property to a bankruptcy trustee who will then turn around and liquidate the property and distribute the proceeds from that property the unsecured creditors of the debtor. The amount of property that debtor is able to exempt varies from state to state. For anyone to be eligible for a Chapter 7, they have to go through a process that is known as the means test that will determine the eligibility of the individual.

In bankruptcy, Chapter 9 is designed more for the cities or boroughs. Chapter 9 has a number of unique characteristics. Because municipalities are objects of State governments, the power of Congress to adjust their debts through bankruptcy is limited considerably by the 10th and 11th Amendments.

Chapter 12 is a chapter in the bankruptcy code that is designed for more of the farmers and fisherman. The chapter states that it was intended as an emergency response to tightening agricultural credit in the early and mid-1980s, in the middle of a number of notable bank failures. The 1898 Bankruptcy Act contained no special provisions, with one exception that farmers were immune from an involuntary bankruptcy petition.

Conclusion

As explained above, all bankruptcy chapters have been designed to not only accomplish something different but also to help the debtor accomplish what it is they are trying to accomplish when they have reached the point of filing for bankruptcy. It makes it easier for the debtor and for the creditor as well as they each have different areas and rules that come with each chapter allowing the debtor and the creditor to come to an understanding or agreement of what is about to happen.

Reference

Palank, Jacqueline (January 12, 2012). "Twinkies Maker Hostess Files for Chapter 11 Protection-WSJ.com". Online.wsj.com. Retrieved 2012-01-12.

Agricultural Finance and Credit, Jonathan M. Bishoff, Nova Publishers, 2008, ISBN 160456072X, 9781604560725, page 91-92.

Epstein, David G. 2002. Bankruptcy and Related Law in a Nutshell. St. Paul, Minn.: West Group.

Hubler, James T. 2002. "The End Justifies the Means: The Legal, Social, and Economic Justifications for Means Testing Under the Bankruptcy Reform Act of 2001." American University Law Review (October).

http://www.usatoday.com/money/industries/food/story/2012-01-11/hostess-bankruptcy-twinkies- wonder-bread/52495162/1